Costly Credit

Costly Credit

Would you be interested in a legitimate way to add tens of thousands of dollars to your financial resources without having to take investment risks? You can accomplish this by using credit wisely.

Consider this: While using credit may temporarily raise your family’s standard of living, the cost of using credit (i.e., the interest charges) will steadily reduce the ability of your family to maintain its standard of living. Because of interest charges, the use of credit can literally mortgage the future of your family, even if your family is not having difficulty now in making the required monthly payments.

Let’s look at a couple of examples that illustrate how interest payments can negatively impact a person’s, or a family’s, standard of living.

In this first example, let’s assume you purchase a new automobile every five years and that you finance $20,000 of the cost with a five-year loan at an interest rate of about 10%. Your total interest cost over the five-year period would be approximately $5,500, and over a 40-year period, your total interest cost would be about $44,000. Moreover, assuming the amount you paid in interest could have been invested at an average annual return of 8%, the total reduction in your standard of living after 40 years would be roughly $326,000 before taxes – almost one-third of a million dollars!

Now, let’s look at another example. Assume you maintain an average balance of $2,500 on credit cards that carry an 18% average interest rate. You would pay total interest of approximately $2,250 over a period of five years and about $18,000 over a period of 40 years. Again, assuming the amount paid in interest could have been invested at an average annual return of 8%, the total reduction in your standard of living after 40 years would be about $116,000 before taxes. Furthermore, if your average credit card balance is $10,000, which is currently about average for credit card users who don’t pay the entire balance each month, you would suffer a pretax reduction of more than $464,000 – close to a half million dollars – in your standard of living over a 40-year period.

With prudent money management, most people are capable of paying cash for almost everything they need and for most of their wants, with the primary exception being the purchase of a house. However, it may take a few years to make the transition to being able to do so. The important thing to consider is that the sooner you start, the greater will be the long-term benefit to your standard of living.

The secret of how to be able to pay cash for virtually all of your needs and for most of your wants is actually relatively simple: Live more modestly than you otherwise would – at least until you are regularly saving enough to eventually be able to cover the costs of your expected future major expenditures, including what is likely to be needed for you to live comfortably during your retirement years.

Thus, rather than purchasing a brand-new car the next time you decide to replace your car, buy a significantly lower-priced car that meets your basic needs. Then, take the following steps that should eventually enable you to pay cash for your cars:

1. After you have paid off your car loan, begin making payments to a savings account that you have established to pay for your next car.

2. Keep your car as long as possible – preferably for at least 3-5 years after the car loan has been completely paid.

3. When you purchase your next car, try to limit the purchase price to the amount that you have saved for it. However, if you really need a better car that will cost more than what you have saved, finance as little of the price as possible.

4. Repeat the first three steps.

Basically the same steps can be applied in making virtually any major purchase. Within less than 10 years and perhaps less than five years, you should be able to pay entirely in cash for your cars and for other major purchases you make.

One of the common tendencies of people today is to want instant gratification. Often Christians are not content to wait for God to provide them with the money to purchase what they need. Rather than wait, they rely on credit to purchase various items, many of which they don’t really need immediately. (To “rely on credit” means borrowing to pay for items, because of the inability to pay with cash. Thus, someone who pays the entire balance on their credit card statement each month is not relying on credit.)

Deferred gratification can be achieved by submitting to the authority of the Holy Spirit, to let Him give you and your spouse the ability to practice the necessary degree of self-discipline, or self-control, referred to in Galatians 5:22-23.

Philippians 4:19 tells us that “God shall supply all your need according to His riches in glory by Christ Jesus.” This suggests that Christians should wait for God to provide the money for each need before making a purchase. The scripture also infers that relying on credit to provide for our needs may reflect a lack of faith in God. (Although a house probably is a reasonable exception, the price of the house certainly should be a matter of prayer, because large mortgage payments can wreak havoc with a family’s budget.)

If God does not provide us with the money to make a purchase, perhaps we do not have a need — maybe it is a want or a desire. Or, maybe we are out of fellowship with God.

Although many families may not be able initially to pay entirely in cash for the most costly items they need, such as an automobile, most families should be able to do so within a period of less than 10 years and perhaps less than five years.

Philippians 4:13says, “I can do all things through Christ who strengthens me.” Why not trust Him to help you to begin immediately to take the necessary steps toward freedom from relying on credit!

Copyright 2014 by Harvey Armour. If you have any questions or comments about this article, contact Harvey Armour at harveyarmour@yahoo.com. Mr. Armour desires to provide helpful insights from a Christian perspective on financial matters and difficult biblical matters. The information provided with regard to articles on personal or family money management is not intended to replace professional advice. Please consult with your own independent attorney and tax accountant to review and approve your financial decisions.